Location Basis Differentials in Crude Oil Prices

We examine the long-run pricing relationship among crude oil prices at the North Sea (Brent) and Cushing (WTI) delivery points. The Brent-WTI location basis differential is stable until December 2009, but it widens to record levels in the next two years. We report on recent changes in the crude oil market that caused the prices to move apart. Brent and WTI prices are cointegrated prior to this structural break, but not between 2010 and 2015. Since the U.S. lifted the crude oil export ban in December 2015, Brent and WTI prices have reintegrated. U.S. retail gasoline prices respond to Brent and WTI before January 2010 and then only to Brent afterwards.

Keywords: Brent, West Texas Intermediate, Crude Oil, Basis Differential

JEL Classification: G12, G14, G18, Q35, Q41

Suggested Citation: Suggested Citation

Luong, Phat V. and Mizrach, Bruce and Otsubo, Yoichi, Location Basis Differentials in Crude Oil Prices (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=2436908 or http://dx.doi.org/10.2139/ssrn.2436908